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ECN 306 Homework 2 answers - ECN 306 Spring 2010 Homework#2...

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ECN 306 Spring 2010 Homework #2 1.) Estonia maintains a fixed exchange rate for its currency the kuna at a rate of 10 kuna = 1 Euro. The Estonian central bank has issued 20 billion kuna that are in circulation in the economy, and it holds reserves of 2 billion Euros. Most likely, the exchange rate regime in Estonia is: If Estonia “maintains a fixed currency” then its regime is a peg or fixed exchange rate– and since there seems to be a one-to-one relationship between domestic currency in circulation and the country’s reserves, this is probably a currency board arrangement. 2.) An open economy is characterized by Y + M = C + I +G + X and has I=X=G = 50 and M= 60. a. Assume that consumption is given by C = 10 + 0.9Y. Equilibrium GNP (Y) is calculated as follows: Y + M = C + I +G + X Y = C + I +G + X - M Y = 10 + 0.9 Y+ I +G + X - M Y - 0.9 Y = 10 + I +G + X – M 0.1Y = 10+ 50+50+50 – 60 Y = 10(100) = 1000 Now assume that rather than having M=60, we have M = 20 + 0.1Y. Equilibrium Y is:

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ECN 306 Homework 2 answers - ECN 306 Spring 2010 Homework#2...

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